Interestingly, the DeFi community always seems to forget how important and even necessary it is to change the insurance industry using DLTs and smart contracts completely. What has been started in traditional finance must also be done in insurance! Health, property, and life insurance need to be changed in the same way that there are new ways to lend and borrow money.
In this post, I’d like to start exploring the world of Web3 insurance by talking about some of the vast benefits that could come from combining insurance and Blockchain technology. So, let’s get started without further ado.
Many Pay for a Few’s Losses With Insurance Premiums
Insurance contracts are based on the idea that one party agrees to pay another party for taking on risks and possibly making up for losses. In this way, insurance is a way to manage risks and get ready for bad things that might happen in the future. In case of a claim, the policyholder is entitled to a certain amount set by the contract between the two parties. The money is meant to help the policyholder get back on their feet after the loss.
Today, you can insure almost anything. Natural disasters, like property damage from hurricanes, can be insured the same way as a car or crops because they all work on the same principle: the insurance company takes over the risk from the insured. It promises to pay for any losses in exchange for payments called premiums. But because of different rules in different countries, different things that can be insured, and different kinds of insurance, taking risks and signing a contract called an insurance policy can look very different.
It’s important to know that anyone or anything that asks for insurance coverage starts a two-way relationship with the insurer and joins a risk pool as a whole. If all policyholders are in the same risk pool and pay their premiums, the insurer can pay out the agreed-upon amount if a claim is made. The tips of many pay for the losses of a few. This principle will be necessary for insurance coverage that a single company doesn’t run.
How Blockchain Can Rebuild the Insurance Sector
But what seems simple is very complicated and requires a lot of work from the insurance companies to get right. Most of the time, the insurance process is already complicated before any contract is signed or a claim is made. Customers usually have to fill out an application for insurance coverage, which the insurance company then looks at to figure out if there are any risks and how much the premiums will be.
In the same way, it must be written down which events and risks are covered in which situations. Taking this idea a step further, the insured would have to tell the insurance company about a loss at some point to get paid. The insurance company would then have to review, look into, and write down what happened.
There are a lot of manual steps and coordination efforts in the insurance business today. Even worse, the industry’s ability to work is threatened by things like incorrect data, fraud, and mistakes made by people, to name a few.
Enter Blockchain. DLTs are the best way to solve many of the industry’s problems right now. For example, medical records could be encrypted and shared between service providers in health insurance. This would make the health insurance ecosystem more efficient and help people work together.
In this situation, hospitals and insurance companies could form a peer-to-peer communication network that lets them share patient data that can’t be changed once it’s been entered. This would make sure that there are no fraudulent claims. So, blockchains are perfect for the insurance industry because they make it easy and safe to store and share precious data.
In the same way, automated processing can be done with smart contracts. As was said above, the insurance business is stuck in the past regarding customer experience and automation in many areas, such as handling claims.
Manually processing data slows down many tasks, so they need to be automated by using smart contracts that run based on agreements and events that have already been set. For example, smart contracts could reduce the number of manual steps needed to process data and figure out reimbursements. This would speed up processes and reduce human error.
I could keep going on and on about that list of things that bother me. Instead, let me sum up by saying that DLTs offer a wide range of opportunities that could have the biggest effect on the insurance business in hundreds of years. It’s not just about making records clear and reliable, making things simpler and cheaper, and giving basic coverage to people who don’t have it.
For the first time in history, the basic idea of protecting the few by protecting the many might also be possible without a major party. We can improve the insurance industry and society as a whole with web3 insurance. And by making people safer, we can make the whole world safer.
New (Insurance) Worlds
But these changes aren’t just happening in the traditional world of insurance. More and more people want to protect their crypto wallets and assets, such as NFTs, with insurance. Peer-to-peer insurance models are also more important than ever in the “new world” because of smart contract bugs in many protocols, rug pulls, and the collapse of crypto markets. The recent collapse of the Terra/Luna market has made it clear that we need new and more robust insurance policies.
Since decentralized insurance is still new and often overlooked, it’s time to give it the attention it deserves to drive ideas, concepts, and solutions that will improve how we think about and handle risk.
It’s time to talk more about how DLTs could change the insurance business since there is still a lot to develop and test before reaching their full potential. Also, legal systems are a big obstacle to getting around. Regulation needs to quickly adapt to and include Blockchain technology to give the industry the direction to keep moving forward. Also, big players in the insurance and reinsurance markets need to do more to be careful. All of this shows that we are just starting to rethink and change the insurance industry for the better.
Check out our other post to learn more about how Blockchain technology will change the insurance business, which startups are working on which solutions, and what traditional insurance companies are doing in decentralized insurance. I’m glad you read it.